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The longest U.S. economic expansion in history is writing its final chapter as COVID-19 casts a long shadow on the economy, including what was a vigorous housing market just a few months ago, prior to the outbreak.
Last year’s active spring homebuying season was driven by robust house-buying power, a stark contrast from this season’s tepid activity. The housing market has been hobbled as listings across the country disappear, lenders tighten their credit requirements, homeowners are forced into forbearance and buyers shelter-in-place.
Home sales are expected to fall by roughly 15 percent in 2020, according to a report by Fannie Mae. The report forecasts that existing home sales will plunge by nearly 1 million units, dropping to an annual rate of 4.54 million, down from 5.34 million in 2019.
As existing homes ghost the market, new construction is also stalling. Construction starts plunged 22 percent in February, according to a report by the U.S. Census Bureau and the Department of Housing and Urban Development.
“Right now we have a housing shortage. There are fewer listings and fewer buyers,” says Lawrence Yun, chief economist of the National Association of Realtors. “Because of the pandemic, construction has been halted in some states. Our target is five to six months of housing supply, today it’s under four months.”
The current environment has sent buyers into hibernation as reflected by dwindling home loan activity. Mortgage purchase applications fell 31 percent compared with the same time last year, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 17, 2020.
“The pandemic-related economic stoppage has caused some buyers and sellers to delay their decisions until there are signs of a turnaround,” said Joel Kan, an MBA economist, in a statement. “This has resulted in reduced buyer traffic, less inventory, and March existing-homes sales falling to their slowest annual pace in nearly a year.”
Can home values hold during the economic downturn?
Before COVID-19 shocked the U.S. economy, home values were on a four-month accelerated track. February home prices surged by 4.1 percent year over year, while January brought the eighth consecutive year of annual home price gains in the U.S., according to CoreLogic’s monthly Home Price Index report.
Job gains, credit availability, low interest rates and a hungry homebuyer segment fostered this growth. But now, as unemployment numbers continue to rise, with more than 30 million people filing for unemployment insurance in the past six weeks, the housing market has skidded off course, and experts aren’t sure where it’s headed.
“The nearly 10-year-old recovery of the U.S. housing market has run headlong into the panic and uncertainty from the global COVID-19 pandemic,” said Frank Martell, CEO of CoreLogic, in a statement. “In terms of home value trends, we are in uncharted territory as we battle the outbreak with measures that are generating a never-before-seen, rapid downshift in economic activity and employment. We expect that many homeowners will initially be somewhat cushioned by government programs, ultra-low interest rates or have adequate reserves to weather the storm. Over the second half of the year, we predict unemployment and other factors will become more pronounced, which will apply additional pressure on housing activity in the medium term.”
Low inventory no help for nervous buyers
A major influence on home prices is inventory. The lower the supply, the higher the prices as homebuyers exceed the number of homes for sale. Right now, inventory is tight, which might help keep home values up. However, if demand drops off due to economic uncertainty, then we could start seeing values drop, too, says Ken H. Johnson, an economist at Florida Atlantic University’s College of Business.
“You don’t have a supply and demand intersection right now. A shortage of housing is not going to help keep prices up,” Johnson says. “The reason is uncertainty. Uncertainty is a sound economic principle. Uncertainty kills deals. People are fleeing the market.”
The murky economic outlook isn’t the only thing fueling uncertainty, Johnson says, but the fear that the housing market is long overdue for a price correction. If people fear that they’re buying at the top of a bubble, especially one accelerated by a global pandemic, then they’ll put off purchasing until prices begin to drop.
Half of Americans don’t think purchasing a home today is wise
In a recent Gallup poll, only 50 percent of Americans believe it’s a good time to buy a house, which is the lowest percentage in Gallup’s polling history. This is 2 percentage points lower than in 2006, during the housing bubble.
Americans are also pessimistic about home prices in their area, with just 40 percent stating that prices will rise; this is a 22 percent drop from a year ago when 62 percent believed prices would go up. Meanwhile, 25 percent of Americans polled said that prices will drop in their area, up more than double from last year’s 9 percent; 33 percent believe prices will stay flat.
In the 100 largest metropolitan areas in the U.S. based on housing stock, 33 percent have an overvalued housing market, 38 percent are at value and 29 percent are undervalued, according to the CoreLogic Market Condition Indicators (MCI).
Further shrinking demand, says Johnson, are millennials, the largest share of homebuyers. The millennial share of home purchase applications dropped by 13 percent as of the week ending March 28, according to CoreLogic.
“Millennials, by far, make up most of the gig economy – about 75 percent, these are 1099 folks. It’s harder for 1099 folks to qualify for a loan. So, yes, you’re going to shrink the demand,” Johnson says.
Home values can be saved if COVID-19 is short-lived
Most home value forecasts rest on one thing: how long this pandemic lasts. The timeline is crucial, as the longer it drags on the deeper the cut to the economy and the harder it is to recover. The government intervention is keeping the economy from going into a total meltdown, which is important for recovery.
“The federal government is permitting mortgage forbearance, which is providing time and preventing foreclosures; this is preventing the industry from crashing,” Yun says.
If the pandemic doesn’t drag on, Yun predicts that 70 percent of jobs will come back quickly and that the credit shortage will steadily ease. He also cites new policies, such as appraisal waivers and notary e-signatures, from the GSEs (Fannie Mae and Freddie Mac) as well as the FDIC and FHFA that will help facilitate home sales as people navigate closures and restrictions.
Johnson agrees that a quick recovery can save sinking home values, though not completely.
“Let’s suppose we solve the health issue relatively soon, the market will open up pretty quickly. We might see a little bit of a downturn but not a crash,” Johnson says. “Right now housing is about 5 to 10 percent overpriced, we’re due for a housing slowdown anyway. It all boils down to how quickly can we get sellers to show their properties and how fast buyers are ready to make offers.”
What should homebuyers consider
There’s no guarantee that home prices will rise or fall, so homebuyers should be sure that their purchase makes sense. Since inventory is tight, many buyers might have to compete with multiple bidders for the same house — which can drive up prices.
For buyers who don’t plan on staying in the same home for at least five years, the risk is higher because their home might not rise in value enough to make up for expensive buying and selling costs.
To learn why the five-year rule makes sense most of the time, you can read more here.